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Forming a New Mexico Living Trust

Making A New Mexico Living Trust

New Mexico Living TrustAs an estate planning attorney in New Mexico, I am often asked whether it is better to have a will or trust. The answer to this really depends more on the individual’s situation. In some cases, I’d say that a will is a perfectly fine estate planning device, and a trust is probably not necessary (this is usually the case with smaller estates). The general issue is that when the creator of the will passes away, the will must be admitted to probate. Fortunately, New Mexico has an informal probate process, which makes probate avoidance not quite as important. In many ways however, a trust can provide more flexibility in how property is left to loved ones; I should note that a trust can be created within a person’s will (this is known as a testamentary trust). There are different types of trusts that can be used for things like asset protection, NFA firearm ownership, or to provide additional support for someone on government assistance (a special needs trust).

Advantages of Owning a New Mexico Trust:

For smaller estates ( greater than $50,000 in total value) probate avoidance is one of the most beneficial aspects of owning a trust; probate avoidance can save on money and time. Estates smaller than $50,000 can file a small estate affidavit. In fact, I often tell people that if they do a simple will and later require legal help with probate administration they will often pay the same amount (or more) as they would have, had they used such a trust instead.

New Mexico Probate Avoidance

Why is avoiding probate a good thing?

Probate Avoidance New MexicoTo understand why avoiding probate is a good thing, a person must understand how title of property passes when someone dies. Some assets are transferred by contract or operation of law and are not subject to probate; this includes things like life insurance policies, real estate held as joint tenants, or pay on death bank accounts. Other assets that are titled in the decedent’s name alone generally must pass through probate; these types of assets include real estate or a car titled in the decedent’s name, or a bank account without a beneficiary designation.

Probate requires that the decedent’s will get admitted and someone (referred to as the Personal Representative or Executor of the Estate) gets appointed to administrate the Estate. Petitioning the court and admitting the will can be done without the aid of an attorney, but I’ve found that most clients that hire me for probate work, value the help due to the loss they’ve recently endured. Pursuing a probate will certainly come with a cost (filing fees, and publication fees) and will cost even more when using a New Mexico probate lawyer. Time may also be “of the essence” and the probate process can delay the transfer of assets. Additionally, probate cases are public records, and thus anyone can see exactly what the will says (some would consider this an invasion of privacy).

It is noteworthy that avoidance of probate can be done with simple estate planning that does not necessarily require a trust. As mentioned above, certain assets can pass free of probate (often called non-probate assets), so it is certainly possible to re-title assets to avoid probate. Depending on the size of the estate and the amount of assets, using probate avoidance devices other than a trust may become too cumbersome. Example of re-titling assets would be changing the titled owner of the car from “Your Name” to “Your Name OR Spouse’s Name”.

Incapacity of the creator

A proper estate plan will include a will, a financial power of attorney, and a medical power of attorney at the a minimum. Many that have used a power of attorney have encountered banks or other entities that will not accept a power of attorney that is several years old, even though it is still legally valid. A trust can take care of incapacity as it relates to the administration of finances through the use of successor trustees. Incapacity is generally defined within the trust itself, but the key is that if the condition for incapacity is met, then the successor trustee becomes active and can then manage the property on behalf of the Principal. There is a limitation, in that the trustee can only manage property that has been actually placed into the trust. When doing an estate plan for someone wanting to create a trust, my firm’s general practice is to provide the client with a financial power of attorney, a medical power of attorney, burial instructions, and a pour-over will.

Privacy

As mentioned above, a will must be submitted to the court where it then becomes a public record. Any will that is admitted to probate can be seen by anyone; there are many reasons why a person wouldn’t want their will to be seen by anyone (like strange requests – “to be buried in my car”, for example). A trust can privately devise property, and not everyone has a right to see the trust agreement or the terms of the trust as they would with a probated will.

Tax Benefit

There is no doubt that for larger estates a trust is a necessity; this statement therefore raises the question of “What is a large estate?” Unfortunately this is not an easy answer, simply because the law is currently in flux regarding applicable estate & gift tax exemptions. At the time I write this (late 2012), current estate tax exemption is $5,000,000 per person, but the amount is set to revert back to $1,000,000 unless Congress intervenes. Right now over $5,000,000 may be considered a large estate, but next year a large estate could be anything over $1,000,000. The tax benefits of using a trust, basically allow a married couple to maximize their estate exemptions, which minimizes tax liability (and considering the tax rate, the savings could be enormous). The flexibility of the trust allows a couple to maximize their allowable exemption (whether it is $5,000,000 or $1,000,000) at the time of death.

Control

This aspect comes in a couple different forms. Gifts to minors in a will are generally subject to the Uniform Transfer to Minors Act (UTMA) which makes it so that the minor will receive their inheritance at either 18 or 21. In many cases, a person may not want their child to have their full inheritance when they are 18 or 21.  Using a trust, a distribution scheme can be established that gives the child portions of their inheritance at discrete periods (21, 25, and 30 for example), or a distribution scheme can be used that will provide income to the child for life.

Another example of the level of control that a trust provides is that a person can leave a business to their child, but have someone run the business because they child would have no interest or would be incapable of running the business.

Summary

Creation of a trust is not for everyone. In fact, trusts are more cumbersome to setup than doing a simple will; this is partly because all assets must be re-titled into the name of the trust. Avoidance of probate without a trust generally also requires that assets be re-titled. The alternative to probate avoidance and estate planning is that the certain assets will have to go through probate to get re-titled in the name of the beneficiary. In a sense, I tell clients that they can jump through the hoops to re-title property now, or let that burden pass to their children to do it after they have gone.

Trusts are really not much more expensive when considering the potential costs of probating a will. The benefits and flexibility of using a trust to pass property are clear, but it doesn’t mean a trust is always necessary. For questions about New Mexico Estate Planning see our New Mexico Estate Planning FAQs, contact me (an Albuquerque Estate Planning Lawyer).

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